Gary Gereffi on protectionism and its impact on global value chains

Gary Gereffi is Professor of Sociology and Founding Director of the Center on Globalization, Governance, & Competitiveness at Duke University (http://www.cggc.duke.edu/). He received his B.A. degree from the University of Notre Dame and his M.Phil. and Ph.D. degrees from Yale University. Gereffi has published numerous books and articles on globalization, industrial upgrading, and social and economic development, and he is one of the originators of the global commodity chain and global value chain frameworks. His most recent books include: Brazilian Industry in Global Value Chains (Portuguese and English) (Elsevier, 2014); Shifting End Markets and Upgrading Prospects in Global Value Chains (special issue of International Journal of Technological Learning, Innovation and Development, 2011); Global Value Chains in a Postcrisis World: A Development Perspective (The World Bank, 2010); and The New Offshoring of Jobs and Global Development (International Institute of Labor Studies, 2006).

His major ongoing research projects are: (1) a book on the uptake of the global value chain paradigm by major international organizations in the economic and social development arena; (2) work with the World Bank and the Inter-American Development Bank on export competitiveness, workforce development, and regional value chains, with an emphasis on Latin America and sub-Saharan Africa; (3) member of the Global Agenda Council on “The Future of Manufacturing” (World Economic Forum), which will initiate a “Global Manufacturing and Industrialization Summit” co-sponsored by the United Nations Industrial Development Organization (UNIDO) in March 2017; and (4) “A Global Value Chain Analysis of Food Security and Food Staples in the Energy-Exporting Countries of the Middle East and North Africa (MENA) Region,” funded by the Minerva Initiative (U.S. Dept. of Defense) (2012-2016). On April 5, 2017, he spoke with Yujia Yao CMC '19.

Photograph and bio courtesy of Dr. Gereffi and Duke University.

Will President Trump’s proposed policies to “bring jobs back to America,” such as cutting corporate taxes and eliminating regulations, matter for attracting manufacturing jobs back to the U.S.? How many jobs can be brought back to the U.S. through such measures?

These Trump policies are a response to several decades of U.S. companies, especially in consumer goods industries, deciding to move part of their production of finished goods offshore to try to reduce costs. These attempts characterize industries like the apparel industry, footwear or toys. Later it was happening in more sophisticated industries like automobiles, shipbuilding, aircraft, and even some high-technology electronics industries.

There are several problems if one simply says “bring jobs back” from these industries. Take the furniture industry, which has been big in North Carolina, as an example. If the production moved offshore and factories closed, the management team and many of the skilled workers would also be dismissed. Ten or 20 years later, when Trump wants to bring jobs back, the top management of these companies and many of their workers will have dispersed. As a result, we have lost the necessary capabilities at home.

Another challenge is when production, in terms of the supply chain, has been moved offshore. Frequently the U.S. company is dealing with network production where the assembly of finished goods is moved offshore, while some key components or subassemblies are provided from the U.S. Running a company like that means knowing how to manage global production networks. Many U.S. companies that initially focused on making everything at home have no idea how to manage such productions where cross-border logistics need to be very precise and the financing is decentralized.

The third and maybe the most crucial factor for Trump’s argument is when those industries moved offshore, they transferred the relatively labor-intensive stages of production. Some of those industries may return to the U.S., either for cost reasons or because the technology has become much more automated (such as the case of smartphones, electronics or even consumer appliances). However, even if the same companies that left the U.S. now return, they are going to bring back far fewer jobs than before because production was probably more labor intensive in the earlier period.

For all the above reasons, if Trump tries to bring back an industry that has left 20 or 30 years ago, in many cases, the number of jobs that would be associated with U.S. domestic production is going to be much fewer. The skills associated with those jobs also might be a lot higher today than when the industries left the U.S. in the 1990s or early 2000s, so the workers employed in repatriated production will be different from those in the industry prior to offshoring.

How would Trump’s proposed policies affect the foreign countries that rely on exports to the U.S.?

It could certainly be a crippling blow to many countries. In the mid-1980s, the U.S. promoted a set of policies called the Washington Consensus whereby the World Bank and the International Monetary Fund was pushing many countries, including South Korea, Taiwan, China, Mexico, and many others to adopt export-oriented industrialization (EOI). These countries were encouraged to industrialize by opening their doors to foreign direct investment (FDI) and export products to the U.S. market in order to earn more foreign exchange.

Now Trump is proposing to place a border tax on imports and says the U.S. does not want those countries engaged in EOI to have free access to the U.S. market, even though many like Mexico or Central American economies have spent years tethered to the Washington Consensus model. The same is true for Asian countries like Cambodia or Vietnam. Certainly, we would be hurting those countries’ major sources of growth, which are their export industries.

How would Trump’s protectionist policies, such as raising tariffs on imports, affect U.S. companies that are part of global supply chains? Which kinds of companies will be most affected?

Trump’s policies will have two kinds of negative effects. One would be on the countries that are exporting to the U.S. market under policies that United States had previously favored. The other kind of economic harm would occur inside the U.S..

Many of the medium and high-tech companies, such as in the automobile industry, import goods, especially parts, from other countries around the world. They have set up regional and global supply chains to make finished products using imported parts. The same is true for the electronics or aircraft industries. If Trump were to impose tariffs on imported parts, all those companies that make the final products in global supply chains would be less competitive, since now they face higher production costs. They would have to either raise their prices on final products, or buy all parts from domestic sources (an impossibility in today’s supply-chain world). For instance, a car has about 20,000 distinct parts and even an iPhone or an iPod has hundreds of parts, many of which are not available in the U.S. supply chain. If you try to raise taxes on all the inputs that are made in different countries, you're not only affecting the parts producers abroad, but the final goods producers in the U.S..

The assumption seems to be that if other countries are making toys, clothes or shoes that we are consuming in the U.S., we can bring those final goods back by having an import tax that would encourage more local production. However, many of the goods imported into the U.S. are intermediates, not final goods, and therefore the companies located in the U.S. will be damaged because the supply chain will be less efficient. In the U.S. automobile industry, for example, 40% of the US$20.2 billion in auto parts imported from Mexico in 2015 are U.S.-made parts and components. If we tax these intermediate goods imports, we are directly hurting U.S.-based automakers and parts suppliers as well. That would be very counterproductive.

In February 2017, Trump stated that the Chinese are “grand champions” at the “manipulation of currency” and has suggested the U.S. may renegotiate its trading relationship with China. How could a trade war with China work to the advantage of the U.S.?

The economic interdependence between U.S. and China is so great that a trade war that will hurt China will probably hurt the U.S. just as much and maybe even more.

It is true that currency adjustment is one of the ways that countries can rebalance their economies without getting into tariffs and other forms of trade restriction. It involves a macro rather than a micro approach to economic adjustment. In fact, we have a strong historical precedent for that. In the Plaza Accord of 1985, the U.S. asked Japan, South Korea, and Taiwan, along with Germany, to appreciate their exchange rates in relation to the U.S. dollar in order to reduce the substantial trade surpluses each country had vis-à-vis the U.S. economy. The Plaza Accord was a much simpler approach to lower trade deficits because it focused on a single policy tool.

During the early 1980s, another mechanism to deal with trade imbalances with Japan was introduced: voluntary export restraints (VERs). In 1981, VERs limited the Japanese automakers to exporting just under 1.7 million cars to the U.S. market. This quota was intended to expire after three years, but after they were adjusted upwards, VERs remained in place until the mid-1990s. This policy had the effect of requiring many of the Japanese automakers and later also the European and Korean companies to build plants in the U.S. if they wanted to sell their products in the American market. It was also a way to revitalize U.S. automotive supply chains. Thus, in the 1980s and beyond, the U.S. dealt with trade imbalances through policies that encouraged inward FDI in higher technology industries; this created U.S. jobs as well as encouraged the development of local suppliers in the U.S..

These policies had the advantage of encouraging other countries to invest more in U.S. manufacturing and create local supply chain linkages. Trump has been pushing for more investment in the U.S.. Samsung just announced that they are looking to increase their manufacturing investment in the U.S., and Amazon announced it intends to create a large number of jobs in the U.S. as well.

No one policy offers exactly the right mechanism to solve the trade imbalance; each has different advantages and disadvantages. Maybe the Chinese currency could be devalued, but there are other policies the U.S. government has used in the past that could be effective in inducing foreign companies to relocate their global supply chains to the U.S. It will take several years to accomplish, but there has been successful historical precedent for such cases.

Currently, Chinese and Japanese investors are selling their holdings of American treasury bonds as a warning to the Trump administration. How should the U.S. respond to this?

This is part of the problem of economic interdependence. The fact that the U.S. has very high debt and other countries in Asia, in this case China and Japan, hold a lot of U.S. debt, makes the U.S. extremely vulnerable. If China and Japan decide to sell off some of their holdings, the value of these bonds will become less secure. Given the financial dependence of the U.S. on other countries that hold a lot of its debt means the U.S. should think through its policy decisions very carefully, since other countries can use these financial assets as leverage.

This is also a problem with trade wars in general. When one country starts closing its borders to other countries’ products, the other nations will reciprocate and do the same thing. Once the world starts down this path, it very quickly moves into a period where trade, then FDI, and eventually migration flows between countries are all disrupted. That is what happened in the 1930s during the Great Depression when countries stopped trading with each other. Henry Kissinger commented that economic interdependence lowers the probability of political and military conflicts between nations; countries that trade and invest with each other are less likely to go to war. The danger of the trade war approach is that it isolates countries and encourages zero-sum thinking.

You wrote in the Review of International Political Economy that countries can achieve higher levels of development and increase their economic power by upgrading within global value chains (GVCs). China is one example of such a country. Are there specific countries in Asia that are well positioned to follow in China’s footsteps, becoming more important and powerful participants in global value chains?

Yes. Japan was a leader that did a lot before China. South Korea is another successful country in terms of technological upgrading, partly because many South Korean companies are very large and vertically integrated, such as Samsung, Hyundai and LG. They have been able to create well-known global brands in cars, smartphones, appliances, and other industries. South Korea has probably been the most successful of the developing economies in following the strategy of GVC upgrading. Singapore has been extremely successful as well, focusing on industries like electronics and biomedical sciences, and working closely with neighboring countries such as Malaysia and Indonesia. Singapore has carried out a lot of R&D, and established many prominent players in global supply chains. India wants to do some of the same things, but relying more heavily on its domestic market. It has many large private companies that are very well known (such as the Tata Group, Wipro and Infosys).

Many countries have attempted to upgrade. Only a few have large domestic markets like China, the U.S., and India that permit them to build their own supply chains, and create national champions using their domestic market to help their companies to brand and innovate. But most countries in the world, including South Korea Singapore or Mexico, can grow much faster by linking up to export markets through global supply chains. This strategy of joining global supply chains rather than building them from scratch is a more viable and broad-based growth strategy, especially for smaller countries in the international system.

While big countries may threaten to close their borders, many value chains are becoming regional. Most of the competition occurring in the world today is region competing with region, not country competing with country. Take the U.S. automobile industry for example. It is really a North American industry that is spread across Canada, the United States and Mexico. The same is true with the European automobile industry. China's success in electronics, such as its export of Apple products, is very much a byproduct of a regional East Asia electronics ecosystem. China's final good exports rely heavily on imported components from Japan, Korea, Taiwan, and Singapore.

Thus, a more realistic way to view the world is through the lens of regional value chains competing with each other. North America is competing with Europe and East Asia, rather than the U.S. competing with Germany and China. The national approach is an outdated framework from the economic standpoint. Most industries today are organized into regional and global supply chains. If you try to break them apart, you won't have all the capabilities you need to thrive, even in countries like the United States.

In that case, would you say that the protectionism of Trump will serve as a kind of pushing force for Asian countries to become more united to face the challenge of high tariffs posted by the U.S.?

The short answer is yes. For example, I was in Vietnam for two weeks in February, and Vietnam is a very diversified economy. It exports many types of products to the United States: textiles, apparel, shoes, coffee, seafood and many other products. It is concerned that if the United States becomes protectionist or is looking inward and retreats from Asia and agreements like the Trans-Pacific Partnership, then it's opening the door for China to take the place of the U.S. in the Asian region. For many reasons, Vietnam would prefer to be exporting to high-tech countries like the United States or countries in Europe than having to rely on the Chinese market as a source of growth, where there are much lower standards, technology and prices.

The danger is that if the U.S. withdraws from these historic trade agreements and political alliances that we have created, the U.S. would be opening the door for other countries to move in and take its place. When an international crisis or problem emerges where the U.S. needs partners or collaboration from other countries around the world, then it will be very hard to ask other countries to contribute to multilateral solutions. Big problems in the world cannot be solved without collaboration and partnerships. That's the danger of the economic nationalist approaches we’ve been discussing. International partnerships created over several decades could be undone within several months, but the negative consequences would be long lasting.